Tesla Case Study: August 2018

Elon Musk Tweet: August 7, 2018

Introduction

The following is a case study from August 2018 regarding Tesla (NASDAQ: TSLA) sent to Milton subscribers on 9/24/18 (prior to the resolution of the inquiry from between Tesla/Musk and the US Securities & Exchange Commission). This case study is interesting because it uses a recent real-world example of how Milton quickly changed its view on a stock based on a series of well-publicized events. Before we present the case study, we wanted to caveat that as a team, we are great admirers of Elon Musk and Tesla. Simply put, what Tesla has accomplished over the past 15 years is remarkable. But while the team behind Milton admires Tesla, we do everything possible to ensure the insights presented on milton.ai are 100% data-driven based on the AI system we’ve developed over 2 years.

Background: The "Volume" on Tesla is Loud

While Milton generates insights on over 1,000 publicly-traded US stocks, Tesla (ticker: TSLA) has always been of interest, since the amount of news flow far exceeds the company’s size. In fact, Tesla is often among the top 15 stocks Milton “reads” about when ingesting financial news every day! What does this mean? Most investors (and Milton) hear about Tesla about seventeen times more than a company of its comparable size (context: TSLA ranks 260 on the Fortune 500).

While Tesla’s CEO, Elon Musk, is an influential entrepreneur (83rd most followed person on Twitter), we believe the large community of Tesla skeptics (as measured by TSLA’s “short interest”) contributes to this dynamic and therefore, investor sentiment is an important future indicator for Tesla’s stock price performance. In fact, in June & July 2018, nearly 35% of the public float (actual shares available to trade) was sold short by investors betting TSLA’s stock will decline in the future.

The "Tweet" Heard Around The World

We wanted to take a closer look at how Milton’s Score changed after Musk tweeted the potential of Tesla to go-private at $420 per share on August 7, 2018. Musk’s tweet triggered a series of events that caught Wall Street and the broader financial media by surprise and created volatility in Tesla’s share price. After peaking at nearly $390 intra-day on the day of Musk’s tweet, the stock troughed at nearly $260 almost one month after the tweet on 9/7/18. As of the date of this case study (9/24/18), TSLA stock is at roughly $300 per share. The chart to the right helps illustrate the volatility in TSLA’s stock price from 8/1/18 onwards.

Tesla Stock Price: August 1, 2018 to September 24, 2018

What Happened to Milton's Score?

Starting June 2018 through 8/6/18 (one day prior to Musk’s tweet), Milton was neutral on TSLA. But in the one week after the tweet, Milton’s Score dropped sharply and Milton’s View changed from Neutral to Negative, as seen below.

Tesla Stock Price: Before & After "The Tweet"

Why Did Milton's Score Decline?

Though this is a challenging question to answer due to the complexity of our artificial intelligence, we did an analysis to understand how key phrases and concepts in news reports may have influenced Milton’s view of Tesla. Based on our research, between 8/7/18 and 8/14/18, Milton kept seeing concerning phrases and reports about the potential negative legal consequences of Musk’s tweet and broad skepticism about the plausibility to execute a take-private of Tesla, given the size of external funding required and lack of TSLA profitability today. While the stock was roughly flat one week after the tweet (only +2%), Milton had observed a real shift in investor sentiment despite the take-private news on 8/7/18.

Word Frequency: Before & After "The Tweet"

What is Milton's Current View on Tesla?

We choose not to publish Milton’s View on stocks where there is a potential acquisition, like Tesla in this situation. Why? We understand that Milton has real limitations, and an AI system like Milton is not well equipped to add value to users in a situation where the probability of an exogenous event (e.g., take-private) is elevated.

Recent Update: October 2018

On September 29, 2018, Elon Musk reached a deal with the US Securities & Exchange Commission (SEC) to resolve securities fraud charges related to the August 7, 2018 tweet.

The settlement will force Musk to step aside as Chairman of Tesla, and pay a $20 million fine. However, the deal will allow Musk to remain as CEO of Tesla.

About ApteoApteo, the company behind Milton, is made up of curious data scientists, engineers, and financial analysts based in the Flatiron neighborhood in New York City. We have a passion for technology and investing, and we strongly believe that investing is one of the most reliable and effective ways to build long-term wealth. We build AI tools to help informed investors make better decisions.

To learn more about us, please reach out to us at info@apteo.co, join our mailing list at milton.ai, or subscribe to Milton’s blog at blog.milton.ai.

DisclaimerApteo, Inc. is not an investment advisor and makes no representation or recommendation regarding investment in any fund or investment vehicle.